BLOOMBERG: Shell Final Audit Shows 2002 Reserves Overstated 41% (Update2): “Royal Dutch/Shell Group, Europe's second-largest oil company, reported its oil and gas reserves as of 2002 had been overstated by 41 percent, the culmination of five cuts that led to investor lawsuits, the loss of three senior executives and more than $150 million of fines.”: “The U.S. Justice Department is conducting a criminal inquiry of the matter. Shell last year lost its AAA credit ratings because of the reserves restatements.” (ShellNews.net) Posted 8 March 05   

(Bloomberg) -- Royal Dutch/Shell Group, Europe's second-largest oil company, reported its oil and gas reserves as of 2002 had been overstated by 41 percent, the culmination of five cuts that led to investor lawsuits, the loss of three senior executives and more than $150 million of fines.

Shell's amended annual report, filed today, showed proven oil and gas reserves equivalent to 13.72 billion barrels at the end of 2002. Shell had first reported holdings of 19.35 billion for that year, 5.63 billion more than it should have. The figures mean that more than one of every four barrels, or 29 percent, at Shell was improperly recorded in the original document.

``This is the final chapter in rewriting Shell's history,'' Andrew Bell, London-based European equity strategist at Carr Sheppards Crosthwaite, said by telephone.

Shell, based in London and The Hague, disappointed investors in January 2004 with its first restatement of reserves, leading to closer scrutiny of oil industry practices by internal auditors and regulators. Shell in October announced a plan to unite the English and Dutch parent companies that have owned the group for almost a century, saying it will lead to stronger management.

The U.S. Justice Department is conducting a criminal inquiry of the matter. Shell last year lost its AAA credit ratings because of the reserves restatements.

Lower Profit

Shell made no changes to 2004 profit, reported Feb. 3, and maintained its estimate of end-2003 oil and gas reserves of 12.979 billion barrels. The company declined on that day to specify its 2002 reserves, the last full year for which it had reported numbers with the U.S. Securities and Exchange Commission before the restatements began.

``This is the detail of the prior-year impact of the reserves restatement, which we promised we would provide when we announced our annual earnings,'' Shell spokesman Simon Buerk in London said today. ``There is no new material information in these filings today. The amounts are in line with the previous announcements and provide in some cases a further breakdown of existing figures.''

The shares of Shell today lost 4 pence, or 0.8 percent, to 501.5 pence in London, where BP Plc lost 1 percent. The shares of Shell gained 6.9 percent in London last year, lagging behind the 12 percent gain at BP.

`More Stringent'

In today's restated annual reports, Shell lowered net income for 1999 through 2003 in connection with the previously announced cuts to its oil and gas reserves. Shell lowered net income for 2003 by $183 million, to $12.313 billion, and reduced net income for 2002 by $66 million to $9.656 billion.

Shell has previously estimated the total reduction in past net income without providing the final figures.

Shell's cuts led to calls for the industry to receive stricter guidelines on how to estimate reserves. Daniel Yergin, chairman of the Cambridge Energy Research Associates, last month said oil reserve rules are out of date and need to be improved.

``I expect companies to be much more stringent on reserve reporting going forward,'' said Dirk Hoozemans at Robeco Asset Management in Rotterdam, who helps manage about $4 billion in energy stocks, including Royal Dutch.

Deloitte Touche Tohmatsu, the world's second-largest accounting firm, last month asked the SEC to make oil reserves subject to same kind of internal audits as financial data, preferably using independent petroleum reserve consultants as part of the process. Memos from Shell executives showed management knew reserves were overstated almost two years before the January 2004 disclosure.

`Lying' on Reserves

Shell's former head of exploration, Walter van de Vijver, raised the issue in an internal Feb. 11, 2002, memo titled ``Exposures, Securities and Exchange Commission Alignment,'' in which he said fields in Australia, Oman, Brunei and Nigeria that ``it is no longer `reasonably certain' that the proved reserves will be produced within license.''

In November 2003, Van de Vijver wrote to Shell Chairman Phil Watts saying, ``I am becoming sick and tired about lying about the extent of our reserves issues and the downward revisions that need to be done because of far too aggressive/optimistic bookings.''

Shell replaced Watts and Van de Vijver in March of last year, and later beefed up internal auditing of its reserves. The memos were released by Shell after the audit committee studied what went wrong.

Shell's amended annual report today showed that 38 percent of the cut in its 2003 reserves was in Africa, 28 percent in Europe, 21 percent in the Asia Pacific region, 7 percent in the Middle East, 1 percent in the U.S. and 6 percent elsewhere in the Western Hemisphere. Changes to end-2002 reserves were similar, geographically, with Nigeria alone accounting for 35 percent of the cut and Australia, including the Gorgon field, 16 percent.  

To contact the reporter on this story:

Stephen Voss in London sev@bloomberg.net

To contact the editors on this story:

Tim Coulter in London  at tcoulter@bloomberg.net